Long-term Planning Still Investment Key

YOUR MONEY - STOCKS

October 4, 1998|By Lauren Rudd

Multinational corporations, such as Gillette, are stumbling because of a worldwide economic slowdown combined with a healthy dose of financial chaos. As a result, they are likely to face their worst earnings squeeze in seven years.

Gillette announced Monday it was cutting 4,700 jobs, or 11 percent of its work force, and reorganizing its operations to manage its international operations better. The company, which generates about 60 percent of its $10.1 billion in revenue overseas, said it would take a charge of $350 million for the move, essentially wiping out its profits for the third quarter.

As a group, the nation's 500 largest companies are expected to report a 1.8 percent decline in income from continuing operations from a year earlier, according to First Call, which tracks analyst estimates for corporate earnings. So far 266 companies have warned that profits will be less than expected. The worst sectors are energy, because of weak oil prices that have declined 36 percent from a year ago; basic materials, such as paper, metals and chemicals, off 20 percent; and the financial sector, down 4 percent.

So what is the Federal Reserve doing about the problem? In its infinite wisdom, the Federal Reserve Tuesday lowered a key interest rate to help cushion the U.S. economy against the impact of the overseas markets. Unfortunately, for the short term the move will not have any impact on corporate earnings. Even longer term, the quarter-point decrease was probably not enough to do anything other than provide a psychological reassurance that the Fed may be of a mind-set to lower rates further in the not-too-distant future.

Each reporting season seems to follow a pronounced pattern. The number of upward revisions tends to rise sharply beginning the second week of the quarter. The rise lasts only a few weeks and then decays rapidly. Meanwhile, downward revisions begin to pop up and gain in number during the few weeks just before the end of the quarter and the release of actual numbers.

Why raise estimates early on only to back-pedal later? Besides the initial high hopes held by both a company and its analyst, quite simply it is in no one's interest to see companies miss estimates at the end of the quarter. Companies don't want to disappoint their shareholders, and analysts don't want to anger their clients. So a company, sensing trouble, usually divulges the information to the Street. Sure its stock is likely to fall as analysts respond by cutting expectations. But if the company can then beat the revised number when it actually reports, its stock price is likely to rocket upward.

Are earnings estimates really so important? In the short term, missing a forecast can be devastating. But for companies with proven track records, falling shy of an earnings estimate should not be an automatic death knell.

Instead, you should be far more concerned with a company's long-term future than whether it pleased the Street in any given quarter.

Furthermore, in those instan- ces where Wall Street has pun-ished a stock unfairly because of economic situations beyond its control, you might suddenly have the opportunity to invest in an undervalued company.